J C Penney (JCP) Estimates Cut After Earnings

J C Penney posted a big-time miss in its latest earnings report, recording a surprise loss when analysts were expecting a profit. Shares of the department store chain plunged in the wake of that report and are still tumbling today. The stock fell as much as 6.35% to $7.96 per share during regular trading hours today.

The good in J C Penney’s earnings report

J C Penney reported adjusted losses of 2 cents per share, compared to Sterne Agee’s estimate of earnings of 15 cents per share and the consensus estimate of 12 cents per share in earnings. In a report dated March 1, analysts Charles Grom, Renato Basanta and John Parke said the miss came from several factors, including a gross margin that was much weaker than expected, worse-than-expected other expenses and a higher-than-expected tax rate.

They point out that same store sales improved 4.4%, beating their estimate of 4% and the guidance of 2% to 4%. Total revenue improved by 2.9%, which also was slightly better than they expected, and free cash flow was about $40 million better than they had expected, mostly because the company’s working capital was better with lower inventories and prepaid expenses.

Overall, the Sterne Agee team was happy for the strong comparable quarter and cash flow performance. However, because of how quickly expectations rose, margins were weaker than Wall Street was expecting, which is why they think this earnings report contained mixed results.

The bad in J C Penney’s earnings report

In the negative side, J C Penney guidance for comparable store sales of 3% to 5% improvements, which is lower than the mid-single digits management’s long term plan suggested. Also the retail chain saw negative traffic trends in many locations, although it saw positive traffic in off mall locations.

The Sterne Agee team thinks Chief Financial Officer Ed Record’s comments suggest that comparable store sales will be closer to the lower end of full year guidance in the first half. They believe this is a warning that the company might have trouble achieving a multi-year MSD comparable improvement. Also share gains in declining mall traffic could continue to be troublesome.

New estimates for J C Penney

Management said they expect gross margins to improve by 50 to 100 basis points year over year and free cash flow to be flat with last year. The mid-point of guidance suggest net losses of about $500 million or $1.65 per share.

As a result, the Sterne Agee team cut their estimates for the 2015 fiscal year from a loss of $1.53 per share to a loss of $1.74 per share. For 2016, their estimate moves from a loss of $95 cents per share to a loss of $1.10 per share. The estimate reductions are due to lower than previously expected gross margins. They remain Neutral on J C Penney stock.